Richard Hermann: More apt comparison for recession: Post-WWII

Instead of cutting public spending drastically, our post-war leaders grew our economy by investing in things that paid off hugely over the next generation.

Richard Hermann

Our national leaders and many economists and media pundits have it wrong. The appropriate historical analogy to the 2007-09 Great Recession and its painful, minimalist recovery to date is not prior recessions or even the Great Depression. Rather, it is World War II and its aftermath.

The measure of how bad things are, meaning the national debt in relation to the economy as a whole, is the ratio of debt to gross domestic product (the aggregate amount of goods and services we produce). In 1945, at war’s end, that ratio was 122 percent. Our public debt, in other words, far exceeded our GDP. Today, it is 96 or 98 percent, depending on whose numbers you reference.

By 1950, the debt-to-GDP ratio had fallen under 100 percent and continued to plummet until 1973-74, when it bottomed in the high 30s. The 30-year period from the end of World War II to the first Oil Shock was the era during which the United States became the richest nation in history and our standard of living, incomes and every other measure of national prosperity, skyrocketed.

Instead of cutting public spending drastically, our post-war leaders grew our economy by investing in things that paid off hugely over the next generation. Presidents Truman, Eisenhower, Kennedy, Johnson and Nixon, in conjunction with Congress, invested in (1) higher education and making home ownership affordable for average Americans, both through the GI Bill; (2) infrastructure through the Interstate Highway Program; (3) innovation through the many Space Program spin-off products that poured trillions of dollars and millions of high-paying jobs into the economy; (4) elementary and secondary education as a consequence of the Cold War (especially in reaction to the 1957 Soviet Sputnik launch); (5) social safety nets for seniors and the poor (Medicare and Medicaid in particular); and (6) many more government programs and public-private programs that worked (such as Cooperative R&D Agreements).

At the same time, tax rates were higher than in any other comparable time period in American history, with some minor adjustments along the way to counter short-term trends in unemployment and credit availability. The boom was also coterminous with the years during which government regulation of the private sector was at its historic peak.

What we confront now is much the same as in 1945, only not as bad. A massively expensive military conflict that back then could not be financed from current revenues (in Iraq and Afghanistan, we elected not to finance them at all); relaxed regulation of business and finance (necessary in the 1940s to prosecute the war; unnecessary during the Bush Era when ideology prevailed over essential oversight); and low tax rates (important during World War II; irrational during the Bush years when job creation was anemic in contrast to the higher tax rates during the Reagan through Clinton presidencies when job creation peaked).

The way a country emerges successfully from bad events or bad policy choices is by growing its way out. What Washington is doing, in contrast, is just the opposite. Our leaders should heed the lessons of history and try to replicate those that, beginning in 1945, made us the envy of the planet. Shooting ourselves in the foot won’t do it.